Lilly Q2 sales fall 10%, expenses will be trimmed

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Lower sales volume and the impact of the anti-psychotic drug Zyprexa's patent loss weighed on Eli Lilly's second-quarter earnings. The Indianapolis firm reported a 10% drop in sales, to $5.6 billion for the period ended June 30, compared to $6.2 billion for the same period last year.

Falling product sales were buoyed in part by increased prices, as seen by drugs like Humalog (diabetes) which saw US sales rise 4% vs. the same period last year despite fall-off in prescription volume. Although higher prices were behind the bump, the company noted that Humalog, like the firm's other diabetes med Humulin, was kicked off a major formulary in 2012. Anti-depressant Cymbalta continued to be a strong player, bringing in $1.2 billion in sales, a 22% rise from the same period last year, while ADHD med Strattera's sales slipped 3% to $153 million, compared to the same period the year prior.

What drew much of analyst's attention, however, were not remarks about the pipeline or patent extensions, but the company's expanded emphasis on cost. Lilly said it is going to reduce R&D expenses to 18% to 20% of revenue (from 23%), and trim selling, general and administrative (SG&A) costs to between 28% and 30% of revenue (from 34%) by the close of 2014. The company said this will help increase operating margins and bring ratios back to historic levels.

The long-term guidance is important, wrote ISI Group analyst Mark Schoenebaum in an investor note this morning, because the company's operating margins tend to be about 10% below those of its peers. But he also questioned the long-term financial impact, asking, “If your pipeline fails and your revenue does NOT grow post-2014, can you still expand your margins?”

Lilly's potential challenges are steep: earners Cymbalta and Humalog are aging out of their patent protection (Cymbalta's due to pass over the patent cliff in the US in late 2013), and the company's pipeline includes an Alzheimer's drug that analysts have low expectations for and which is still pending release of Phase III results. However, investors' skepticism for the pipeline drug is already having an impact. The Sanford Bernstein analyst Tim Anderson wrote Wednesday that Pfizer's failure yesterday in the Alzheimer's arena (the drug bapineuzumab failed in one clinical trial) may have been behind the hiccup in Lilly's stock price Tuesday.

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